It's not 'China bashing' if it's true

View full sizeAP Photo/Andy WongChinese soldiers holding red and yellow flags stand at Tiananmen Square during a ceremony marking National Day in Beijing Monday.

By Clyde Prestowitz, Foreign Policy

As the U.S. Presidential election campaign enters its final stages, both candidates are being criticized in the media for "bashing" China.

This is in response to Obama administration filings of anti-subsidy complaints against China with the World Trade Organization (WTO) and to Governor Romney's strong criticism of Beijing's currency manipulation that undervalues its yuan (or RMB) as a way of subsidizing exports and acting as a tariff on imports.

The best example is the Chicago Tribune. Recently, it flatly said that both candidates are "bashing" China and noted that "attacking China's export-subsidy machine is guaranteed to win applause at campaign stops in Ohio and other Midwest industrial swing states, where resentment of Chinese competition in manufacturing runs deep."

Now, from the tone of this, you'd expect that China is completely innocent of any trade rule violations and that the candidates are unreasonably and cynically beating on it as a scapegoat for the off-shoring, layoffs, and unemployment that have all skyrocketed in the mid-west over the past five years. Indeed, you might even think the candidates are in some measure motivated in their critique by racism. After all, the terms "bash" and "bashing" imply anger, rage, violent emotion, and unreasonable hatred. If someone is a critic, he is legitimate, but a "basher" is emotional and unreasonable. The terms are usually applied to characterize criticism of Japan or China but are rarely if ever used with regard to non-Asian nations. When was the last time you read about "Germany bashing"? So the implied charge in the case of one labeled a "China basher" is that he/she is a racist.

Thus, the continuation of the Tribune's commentary was surprising. It acknowledged that "China's efforts to promote its export sector with cash grants, below-market loans, preferential tax treatment and free use of government-controlled property make a worthy target. " In other words, some of China's policies are indeed problematic. In fact, the Tribune went on to note that the sense of a need to create a "level playing field" with China "has a basis in reality." It added that subsidies and regulations in a number of areas along with the power of state owned enterprises has prevented U.S. and other foreign companies from taking the lead in a wide range of Chinese markets. It further noted that theft of intellectual property in China, and China's policy of keeping the yuan weak are enormously problematic.

So the Tribune appears largely to agree that China is doing all the things of which the two candidates have complained and against which the administration has filed complaints with the WTO. But if it agrees with them, why is the Tribune effectively pasting the racist label on the candidates?

In justification of its position, the Tribune makes four points that constitute the orthodox free trade case. First, it argues that even though it might help workers, any restriction or sanction on the free flow of Chinese goods into the U.S. market would be harmful to U.S. consumers. Second, it holds that the activities of getting imports from China unloaded, shipped, displayed, advertised, and sold create new U.S. jobs in place of the jobs that might be lost as a result of the displacement of U.S. produced goods by imports from China. Third, it asserts that any kind of trade sanction could lead to a ruinous trade war that could damage everyone, and fourth, it emphasizes that rather than trying to crack down on China's questionable policies and practices, the U.S. government should focus on persuading the Chinese fully to open their markets.

The difficulty with these points, often repeated by orthodox neo-classical economic commentators, is that they are superficial, internally inconsistent, and at odds with the realities of the trading world. Take the matter of possible harm to consumers arising from any increase in the prices of goods resulting from some restriction on imports. This ignores a couple of important facts. One is that most consumers are also workers. Cheap imports are of little consolation if they have lost their jobs and income. Lost jobs put downward pressure on all wages, not just those in the particular industries that suffer from import penetration. Of course, the exception to this is a situation of full employment which is assumed by the usual econometric models and writers like those of the Tribune. But full employment is not the normal circumstance for most economies. Certainly it is not now the circumstance of the U.S. economy and it is most certainly not true of the economy of the city where the Tribune resides -- Chicago. In situations of high unemployment, the loss of jobs and general downward pressure on wages may far exceed the savings to consumers of slightly lower import prices.

The notion that imports create unloading, shipping, and marketing jobs is also misleading. Think about it this way. Toyota makes a car in Japan and ships it in a Japanese vessel to San Francisco where it is unloaded by American longshoremen and driven by American truckers to a showroom in an American city where it is advertised, marketed, sold, and serviced by Americans. So there certainly are a number of American jobs associated with this import from Japan.

But now suppose that Toyota makes a car in Tennessee with parts made in America and with the assembly done by Americans. Then the car is driven by an American trucker to an American showroom where it is marketed, serviced, sold, and advertised by Americans. In this second case, more U.S. jobs are created than in the first case. Why? Because the vast bulk of the selling, overland shipping, marketing, and servicing has to be done in the United States whether the product is made there or imported. So the truth is that imports do not create net new U.S. jobs or jobs in any country unless they are products that cannot be made or made competitively in that country.

As for the dangers of trade wars, they are much exaggerated. The whole point of the WTO is to have a set of rules and adjudication of the rules. It is inevitable that there will be trade disputes. A main mission of the WTO is to deal with them so that they don't become trade wars. So far the record of the WTO is pretty good on this score.

With regard to prying open the Chinese market, the Tribune calls for that as an alternative to the trade actions called for by the two candidates. This is an old story and it seems to keep selling. I only wish that those who sell it would once in their lives have to serve as trade negotiators. One of the main reasons for complaining about and sanctioning violation of trade rules is to gain leverage precisely for the purposes of opening the market. These negotiations are not pit a pat. Important and powerful interests are involved and they don't give up easily unless faced with consequences as well as opportunities. Countries don't open their markets just because someone from Washington says that would be a good idea. A successful market opening negotiation requires sticks as well as carrots.

Neither Obama nor Romney is a "China basher". The Tribune owes them both an apology.